(1) The time scope considered here is the lead-time. $M$ be the marginal unit cost of stock-out (2).Äownload Excel sheet: service-level-formula.xlsx (illustrated calculation).$H$ be the carrying cost per unit for the duration of the lead time (1).Below, we propose to compute an optimal service level by modeling the respective cost of inventory and stock-outs. Model and formulaThe classical supply chain literature is somewhat fuzzy concerning the numerical values that should be adopted for service level. However, a few years later, we now realize that there are much better options available from the quantitative supply chain perspective which entirely removes the need to optimize the service levels when the technology is powered by probabilistic forecasts. The article has been written from a classic forecasting viewpoint back in 2011.
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